Coal’s Winter of Content

For all the talk of gold, the fact is that the coal mined each year is worth FOUR times all the gold produced each year. Not to mention that coal is Australia’s biggest export earner as well.

And as long as everyone believes the world is warming up then you won’t hear too often how coal fired power stations produce more power than any other source.

Yet despite the discussion around the renaissance in nuclear power, wind-farms, solar energy, and ‘cleaner’ sources of carbon such as gas, coal still produces more power than all of these combined. More to the point this is increasing.

Coal produces 42% of the world’s energy

Source: Merrill Lynch Commodity Research

I’ll leave the global warming debate to our good pal, Kris Sayce, over at Money Morning. But right now, the Northern Hemisphere is already in the grips of an arctic winter. London airports are shut, roads are blocked, and it looks like Aunty Mildred won’t be making it out for Christmas after all. Ah…shucks.

Even though life is so much sweeter down here, ninety percent of the world’s population still insists on living in the Northern hemisphere. It’s going to take a lot of coal to keep them all snug this winter. Last winter was freezing, and this one is shaping up to be another shocker. What was that about global warming…?

After climbing steadily all year, coal prices are really jumping sharply at the moment. This won’t ease off until Spring-time comes round.

Coal prices jumping as winter sets in around the Northern Hemisphere

Source: Bloomberg

These winter prices are a nice little kicker for anyone invested in coal stocks. But it is the long-term story that gets me fired up. And it is this long term story that is behind a quarter of the Diggers and Drillers tips being for coal companies. Readers are now up 52% on average across these three stocks.

Now you are probably expecting me to start banging on about China at this point. “Chinese demand is going to increase forever and forever, Blah, blah, blah, blah, blah….”

But this time it’s all about the other country with more than a billion people.

India.

India’s situation is desperate.

Its power-station’s coal stores are already dangerously low, and they keep building more power-stations all the time.

The country’s coal imports need to triple to prevent a serious crisis.

Its coal imports are big but are really just taking off NOW. Last year, it got through about 375 million tonnes of thermal coal. The chart below shows this demand is expected to jump by 75% to around 650 million tonnes a year.

Indian coal consumption climbing rapidly

Source: Citi Research

The pace won’t slow either. A few weeks ago India’s Coal Minister said that the nation’s annual coal imports will need to TRIPLE in the next twenty years.

Commodity forecasts can be very wrong of course. It’s happened before! But say you are building twenty brand-new, thousand-megawatt power-stations. You can be sure as hell you will need fifty million tonnes of coal a year for the next few decades. This predictability makes for much better forecasts.

India knows it’s going to go compete with China for this coal.

This is why it’s muscling in to the scrum to buy coal deposits now, before they all get snapped up by someone else. Just last week we saw Indian group, Lanco Infratec, snap up Griffen Coal.

Right now it looks like another Indian party has joined the brawl over who gets to buy another coal company which is in fact the first coal company I tipped for Diggers and Drillers, back in March. The price is up 85% since then, but the fun has just started.

With higher coal prices, and competition over good coal projects hotting up by the week, I added a third coal company to the mix just two week ago. It’s already off to a flying start but has much further to go.

A great article. Coal is the ‘nobrainer’ commodity from an investment standpoint. Australian coal companies are relatively expensive when compared to their African peers which is why there is plenty of upside in African coal stocks such as Continental Coal (CCC).

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5 years 11 months ago

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